Share-Based Compensation Expense

3 Months Ended

Apr. 30, 2011

Share-Based Compensation Expense [Abstract]

SHARE-BASED COMPENSATION EXPENSE

(16) SHARE-BASED COMPENSATION EXPENSE

     Ciena grants equity awards under its 2008 Omnibus Incentive Plan (“2008 Plan”) and 2003 Employee Stock Purchase Plan (“ESPP”). These plans were approved by shareholders and are described in Ciena’s annual report on Form 10-K. In connection with its acquisition of the MEN Business, Ciena also adopted the 2010 Inducement Equity Award Plan (“2010 Plan”) pursuant to which it has made awards to eligible persons as described below.

2008 Plan

     Ciena has previously granted stock options and restricted stock units under its 2008 Plan. Pursuant to Board and stockholder approval, effective April 14, 2010, Ciena amended its 2008 Plan to (i) increase the number of shares available for issuance by five million shares; and (ii) reduce from 1.6 to 1.31 the fungible share ratio used for counting full value awards, such as restricted stock units, against the shares remaining available under the 2008 Plan. As of April 30, 2011, there were approximately 4.0 million shares authorized and remaining available for issuance under the 2008 Plan.

2010 Inducement Equity Award Plan

     On December 8, 2009, the Compensation Committee of the Board of Directors approved the 2010 Inducement Plan. The 2010 Plan was intended to enhance Ciena’s ability to attract and retain certain key employees transferred to Ciena in connection with its acquisition of the MEN Business. The 2010 Plan authorized the issuance of restricted stock or restricted stock units representing up to 2.25 million shares of Ciena common stock, of which 1.7 million shares were awarded prior to the March 19, 2011 termination date. Upon termination, those shares remaining available under the 2010 Plan, ceased to be available for issuance under the 2010 Plan or any other existing Ciena equity incentive plan.

     Stock Options

     Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest incrementally over a four-year period. The following table is a summary of Ciena’s stock option activity for the periods indicated (shares in thousands):

	Shares
	Underlying			Weighted
	Options			Average
	Outstanding			Exercise Price
Balance as of October 31, 2010		5,002		$	40.96
Granted		—			—
Exercised		(370	)		15.39
Canceled		(375	)		92.76
Balance as of April 30, 2011		4,257		$	38.61

     The total intrinsic value of options exercised during the first six months of fiscal 2010 and fiscal 2011, was $0.7 million and $2.1 million, respectively. The weighted average fair value of each stock option granted by Ciena during the first six months of fiscal 2010 was $6.95. There were no stock options granted by Ciena during the first six months of fiscal 2011.

     The following table summarizes information with respect to stock options outstanding at April 30, 2011, based on Ciena’s closing stock price of $28.24 per share on the last trading day of Ciena’s second fiscal quarter of 2011 (shares and intrinsic value in thousands):

	Options Outstanding at April 30, 2011				Vested Options at April 30, 2011
		Weighted				Weighted
		Average				Average
		Remaining	Weighted			Remaining	Weighted
Range of	Number	Contractual	Average	Aggregate	Number	Contractual	Average	Aggregate
Exercise	of	Life	Exercise	Intrinsic	of	Life	Exercise	Intrinsic
Price	Shares	(Years)	Price	Value	Shares	(Years)	Price	Value
$  0.01 — $ 16.52	661	5.69	$11.24	$11,244	518	5.03	$11.57	$8,645
$16.53 — $ 17.43	361	4.37	17.20	3,981	343	4.21	17.20	3,783
$17.44 — $ 22.96	349	3.97	21.80	2,245	331	3.81	21.86	2,111
$22.97 — $ 31.71	1,267	3.61	29.43	708	1,229	3.51	29.46	675
$31.72 — $ 46.90	789	4.97	39.47	—	719	4.81	39.69	—
$46.91 — $ 73.78	400	1.62	59.13	—	400	1.62	59.13	—
$73.79 — $422.38	430	0.46	118.77	—	430	0.46	118.77	—
$  0.01 — $422.38	4,257	3.77	$38.61	$18,178	3,970	3.51	$39.94	$15,214

     Assumptions for Option-Based Awards

     Ciena recognizes the fair value of service-based options as share-based compensation expense on a straight-line basis over the requisite service period. Ciena did not grant any option-based awards during the first six months of fiscal 2011. During the first six months of fiscal 2010, Ciena estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions:

	Quarter Ended	Six Months Ended
	April 30,	April 30,
	2010	2010
Expected volatility	61.9%	61.9%
Risk-free interest rate	2.8 – 3.0%	2.4 – 3.0%
Expected life (years)	5.3 – 5.5	5.3 – 5.5
Expected dividend yield	0.0%	0.0%

     Ciena considered the implied volatility and historical volatility of its stock price in determining its expected volatility, and, finding both to be equally reliable, determined that a combination of both would result in the best estimate of expected volatility.

     The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of Ciena’s employee stock options.

     The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. Ciena uses historical information about specific exercise behavior of its grantees to determine the expected term.

     The dividend yield assumption is based on Ciena’s history and expectation of dividend payouts.

     Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information. Ciena relies upon historical experience in establishing forfeiture rates. If actual forfeitures differ from current estimates, total unrecognized share-based compensation expense will be adjusted for future changes in estimated forfeitures.

     Restricted Stock Units

     A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena’s outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based vesting conditions. Awards subject to service-based conditions typically vest in increments over a three to four year period. Awards with performance-based vesting conditions require the achievement of certain operational, financial or other performance criteria or targets as a condition of vesting, or acceleration of vesting, of such awards.

     Ciena’s outstanding restricted stock units include “performance-accelerated” restricted stock units (PARS), which vest in full four years after the date of grant (assuming that the grantee is still employed by Ciena at that time). At the beginning of each of the first three fiscal years following the date of grant, the Compensation Committee establishes one-year performance targets which, if satisfied, provide for the acceleration of vesting of one-third of the award. As a result, the recipient has the opportunity, subject to satisfaction of performance conditions, to vest as to the entire award in three years. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon Ciena’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets.

     The aggregate fair value of Ciena’s restricted stock units is based on Ciena’s closing stock price on the last trading day of each period as indicated. The following table is a summary of Ciena’s restricted stock unit activity for the periods indicated, with the aggregate fair value of the balance outstanding at the end of each period, based on Ciena’s closing stock price on the last trading day of the relevant period (shares and aggregate fair value in thousands):

				Weighted
				Average
	Restricted			Grant Date		Aggregate
	Stock Units			Fair Value		Fair
	Outstanding			Per Share		Value
Balance as of October 31, 2010		5,191		$	13.81	$	71,681
Granted		1,732
Vested		(1,090	)
Canceled or forfeited		(438	)
Balance as of April 30, 2011		5,395		$	15.59	$	84,100

     The total fair value of restricted stock units that vested and were converted into common stock during the first six months of fiscal 2010 and fiscal 2011 was $12.0 million and $24.3 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first six months of fiscal 2010 and fiscal 2011 was $13.34 and $19.85, respectively.

     Assumptions for Restricted Stock Unit Awards

     The fair value of each restricted stock unit award is estimated using the intrinsic value method, which is based on the closing price on the date of grant. Share-based expense for service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably over the vesting period on a straight-line basis.

     Share-based expense for performance-based restricted stock unit awards, net of estimated forfeitures, is recognized ratably over the performance period based upon Ciena’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved involves judgment, and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized against that goal and, to the extent previously recognized, compensation cost is reversed.

2003 Employee Stock Purchase Plan

     In March 2003, Ciena stockholders approved the 2003 Employee Stock Purchase Plan (the “ESPP”), which has a ten-year term. Ciena stockholders subsequently approved an amendment increasing the number of shares available to 3.6 million and adopting an “evergreen” provision. On December 31 of each year, the number of shares available under the ESPP will increase by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 3.6 million. Under the ESPP, eligible employees may enroll in a six-month offer period during certain open enrollment periods. The six-month offer periods begin on December 21 and June 21 of each year with an initial stub period running from October 1, 2010 through December 20, 2010. The purchase price is equal to 85% of the lower of the fair market value of Ciena common stock on the day preceding each offer period or the last day of each offer period. The current ESPP is considered compensatory for purposes of share-based compensation expense. During the first six months of fiscal 2011, Ciena estimated the fair value of each ESPP option on the first date of the offer period using the Black-Scholes option-pricing model, with the following weighted average assumptions:

	Quarter Ended			Six Months Ended
	April 30,			April 30,
	2011			2011
Expected volatility		39.8	%	39.8 – 49.1%
Risk-free interest rate		0.19	%	0.19 – 0.64%
Expected life (years)		0.5		0.25 – 0.50
Expected dividend yield		0.0	%	0.0%

     The following table is a summary of ESPP activity and shares available for issuance for the periods indicated (shares and intrinsic value in thousands):

	ESPP shares available			Intrinsic value at stock
	for issuance			issuance date
Balance as of October 31, 2010		3,498
Issued December 20, 2010		(139	)	$	1,117
Evergreen at December 31, 2010		212
Balance as of April 30, 2011		3,571

Share-Based Compensation Expense for Periods Reported

     The following table summarizes share-based compensation expense for the periods indicated (in thousands):

	Quarter Ended April 30,					Six Months Ended April 30,
	2010			2011		2010			2011
Product costs	$	549		$	505	$	927		$	1,079
Service costs		452			502		883			1,005
Share-based compensation expense included in cost of sales		1,001			1,007		1,810			2,084
Research and development		2,259			2,597		4,646			5,168
Sales and marketing		2,665			3,143		5,123			6,134
General and administrative		2,301			2,140		4,876			5,141
Acquisition and integration costs		345			74		345			234
Share-based compensation expense included in operating expense		7,570			7,954		14,990			16,677
Share-based compensation expense capitalized in inventory, net		(53	)		60		(1	)		125
Total share-based compensation	$	8,518		$	9,021	$	16,799		$	18,886

     As of April 30, 2011, total unrecognized compensation expense was $71.7 million: (i) $2.8 million, which relates to unvested stock options and is expected to be recognized over a weighted-average period of 0.6 year; and (ii) $68.9 million, which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.7 years.